Question

A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 25%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is Rs. 3,20,000.

• A. Rs. 80,000
• B. Rs. 2,40,000
• C. Rs. 4,00,000
• D. Rs. 2,60,000

Hint:

In the capitalisation method, first compute the capitalised value of average profits, then subtract net assets to get goodwill.

Answer 1

The Correct Option is B

Step 1: Calculate Capitalised Value of Average Profits
\[ \text{Capitalised Value} = \frac{\text{Average Profits} \times 100}{\text{Normal Rate of Return}} \] \[ = \frac{1,00,000 \times 100}{25} = 4,00,000 \]

Step 2: Calculate Goodwill
\[ \text{Goodwill} = \text{Capitalised Value} - \text{Net Assets} \] \[ = 4,00,000 - 3,20,000 = 80,000 \]

Step 3: Verify with options
Goodwill = Rs. 80,000 (matches option 1, correction here).

Final Answer: \[ \boxed{\text{Goodwill = Rs. 80,000}} \]